B&B hold emergency talks to save bank

Bradford & Bingley are holding an emergency board meeting today on how to save the beleaguered bank from collapsing.

Super potential: Bradford & Bingely could be merged with Northern Rock to create a 'superbank'

A decision on the future of the company will be made by tomorrow, according to Sky News.

Ministers are considering a dramatic plan to nationalise the lender by merging it with Northern Rock to create a publicly-owned 'superbank'.

Sources stressed that depositors' cash would be guaranteed by the Government. The desperate rescue scheme emerged at the end of another tumultuous week in the global financial crisis.

It would be the Government's most drastic action to shore up the banking system since the Northern Rock debacle.

A takeover of B&B, which has lost 95% of its value in a year, would deliver another blow to Gordon-Brown's fast-dwindling reputation-for economic competence and risk blowing the Government's financial plans apart.

Swallowing up B&B's £41bn balance sheet would push the national debt over £670bn, including £87bn of Northern Rock mortgages.

But Chancellor Alistair Darling wants to avoid a repeat of the Rock fiasco, when the Government spent almost six months looking for a private sector rescuer as thousands of depositors queued to withdraw their savings.

Ultimately the Treasury had to step in.

Now the Financial Services Authority, the Treasury and the Bank of England are drawing up contingency plans to use more taxpayers' money if Bradford & Bingley seems to be running out of cash.

The FSA has been trying to push a number of banks – primarily HSBC and Santander, the Spanish owner of Abbey – into a rescue takeover of the former building society. But the hunt for a 'white knight' has proved fruitless.

Yesterday the Bank of England answered City calls for help with a £62bn programme of emergency loans as the crisis showed little sign of easing.

The Bank has now pumped nearly £170bn into Britain's financial system, trying to bolster confidence. since the credit crunch began more than a year ago. Before the move, Barclays Capital chairman Hans Jorg Rudloff warned that the markets were 'one minute from a terminal heart attack'.

The B&B rescue plan shows the government is prepared to take drastic action to protect the deposits of bank customers. Under existing legislation the first £35,000 of a saver's deposits are guaranteed by the public coffers. The nationalisation of Northern Rock added an even greater layer of protection for its savers, because the bank became part of the Government's balance sheet.

Bradford & Bingley has 337 branches, 2.5million savers and a million borrowers. It had a market value of just under £7bn at the peak of the property boom in early 2007.

Now, after another 6% slide in the share price yesterday, to 20p, it is worth less than £300m. Anyone who hung on to the 250 free shares customers were given when it floated in December 2000 has seen them lose £1,150 in value. The lender insists it has funding to last it through until next year. But it is seen as a particularly risky bet as almost half its £42bn loan book is in buy-to-let mortgages, where default rates are much higher than for conventional home loans.

It needed to raise £400m from its shareholders in June, in a deal which had to be re-shaped twice amid a severe profit warning. B&B borrows nearly 60% of the cash it needs on the wholesale lending markets, which is regarded as a dangerously high exposure in the current financial crisis.

Since the Lehman Brothers collapse last week, banks are more afraid of lending to each other than they have ever been and are desperately hoarding cash.

On top of that, B&B is in grave danger of being frozen out of wholesale markets altogether, following cuts to its credit rating this week.

Analysts say it is close to losing its access to the £100bn Bank of England Special Liquidity Scheme, which allows banks to swap their mortgages for gold-plated government bonds.

Jonathan Pierce, of the investment bank Credit Suisse, said B&B's struggle to tap wholesale lending markets had left it in an 'untenable position'.

Its only remaining options were 'regulatory intervention or managed acquisition by other institutions'. The emergency legislation used to nationalise Northern Rock is still in place, allowing ministers to bring any bank into public ownership if it is necessary to shore up the financial system.

The Bank of England's latest intervention in the money markets is aimed at giving struggling firms such as B&B a breathing space to sort out their finances, by bolstering the flow of funds around the banking system.

As part of the move it will offer up to £40bn in threemonth loans to lenders on Monday, in exchange for bundledup mortgages. Further auctions of cash will follow.

Stuart Gulliver, chief executive of Global Banking and Markets at HSBC, said: 'It's what the market was looking for. It shows a willingness to listen and will alleviate stresses in the UK bank system right through year-end.'

James Knightley, an economist at ING bank, said: 'This takes the immediate pressure off some of the UK banks that have seen their share prices coming off rapidly'. But other experts were sceptical that the £62billion package will prove to be anything more than a short-term sticking plaster.

Economist Peter Dixon of Commerzbank said it would do little at a time when there is an apparent breakdown of trust amongst lending institutions. He added: 'The BoE has underestimated the problems in the banking sector over the last twelve months, and may yet be forced by circumstances to play a more active role in providing support.'

Economists want the Bank to follow up with rate cuts, to help the overall UK economy. Mr Knightley said: 'They they are going to need to cut rates because the UK consumer is incredibly vulnerable, and recession is a major risk.

'They are prepared to do whatever is necessary to help liquidity [in the banking system], but it is getting towards time that they also take action to help the broader economy.'